Does Growth Sustainability Affect Stock Value? An Empirical Investigation in Indian Banking Sector

Abstract

To satisfy the investor’s desire to quick returns, companies had to often trade-off their sustainability and long term growth. The growth rate of a company has the quickest impact on true value of a stock.  The paper tried to study how the growth sustainability (using ROE and retention ratio) affects the intrinsic value of a stock and its deviation from the market value. The paper is divided into two segments. The first part deals with financial relationship between Discounted Cash Flow, P/E Multiplier and Market Value. In the second part the paper uses econometric tools to study the short run association between the variables. The comprehensive empirical work aims at identifying the over-pricing or the under-pricing of the stocks at different phases of growth rates. Econometric tools like ADF, VAR, Grangers Causality and Dynamic OLS is used. Findings of the present work show the divergence between this estimated true and market value of stocks is not significant (at 5% significance level) for the banks that follow steady growth sustainability. Thus the paper concludes at testing the impact of growth sustainability on correct market mechanism of the stock pricing.